Do you think I´m mad????

rick_fantastic · 05-12-2006 9:49am #1

hey there...

so here is my situation....

im 23 yrs old and working full time while doing a part time masters and im in the process of buying a house.

the house is €480,000 and is located in the dundrum / churchtown area dublin.

i would be borrowing in the region of €520,000

my mortgage repayments for the first two years interest only are in the region of €1500 and then after two years they will go up to around €2300.

i will have around €1500 in rental income as long as i have 3 doubles and 1 single room let out (3 doubles * €400, 1 single * €300) kinda going lowest rental i could stretch to... maybe get more for rooms

at the moment i can afford to put €870 a month into the mortgage, but as i finish masters and progress up career ladder my earning etc will increase.

ive worked out my figures and after taking into account for food, light and heat, mortgage protection insurance, car insurance, tax, gym, car repairs, petrol, health insurance i would be left with €320 euro a month for socialising.

now i know that if i do this i will preclude myself from a lot of things such as holidays, nights out on the lash etc etc at least for a while anyway.

the property has a lot of potential rental and expansion wise and i feel it would be a very solid investment if say i decided to sell up in a couple of years....

im having some doubts as to whether this is a good move for me at this stage of my life, but then i could leave it a year or two and the only thing that will change will be the price of houses....

any insight into how hard it is juggling mortgage / being a landlord etc etc????

sorry bout the long post......

hunnymonster · 05-12-2006 9:58am

I'm not an expert and I'm sure those with more experience will be along but no, I don't think you're mad but as you say there won't be holidays for a few years. The two things I would suggest you add to your onsiderations are

1. conventional wisdom suggests you budget with only having the rooms rented for 10 months of the year to allow for when people move etc

2. I don't know what your career is but don't overestimate how much extra money a masters will achieve. You may not move up the career ladder as fast as you would wish.

Salmon · 05-12-2006 10:05am

My advice is to look at the jobs available in your field and see what the average salary is for those jobs! I know when you are doing a masters you might think that its a licence to print money, but in reality it may only be useful to you after you have spent about 3 years in a position and want to move up the ladder (this depends on the area obviously!). Best of luck in whatever you decide, but be careful of overstretching yourself too early! Are you doing the course full time or part time? You must have a good income at the moment?

Moonbeam · 05-12-2006 10:18am

If someone is preperared to give you a mortgage for that much,then your earnings must be pretty good already otherwise it does sound mad.

delly · 05-12-2006 10:20am

I wouldn't say your mad to buy, but I think that the value is a little too much at this early stage. Maybe start off with a 3 bed somewhere around the €350,000 mark maybe? In relation to the mortgage, have you been approved already or just know you will get the mortgage? Also the mortgage can't be any more than the value of the house, therefore the extra €40,000 will have to be some form of personal loan. Add into this a minimum of €28,000 stamp duty depending on if you are going to live in the house yourself or not. And lastly I think the max you can earn is €600 per month before you start paying tax, have you taken this tax payments into account?

Anyhow just some thoughts.

rick_fantastic · 05-12-2006 10:25am

im looking at best case scenario there, but i have looked at all the permutations and combinations of having 2 rooms rented, 3 rooms rented etc etc and putting away a sizeable chunk of cash would leave me after a couple of months with some fallback money in the event that i didnt have the place rented out, i will be living there aswell....

as for moving up the career ladder, im working in IT (with BSc Hons behind me) and im currently doing an MBs in Information Systems. I dont think that having a masters would be a license to print money but i when i finish the masters my salary will increase automatically by about 10k a year if i stay in current job, more if i change jobs...

i am getting the mortgage because my parents are prepared to underwrite the loan on my behalf. if it all went pear shaped and i wanted to get out of it, i would be stuck paying the mortgage until i could sell the house. so taking that the price of the house is going to go up in line with the rate of inflation (around 4%) then the risk involved in my opinion is quite small.

Afuera · 05-12-2006 10:39am

One thing that I think you might be forgetting about here... if you're going to be receiving EUR 1500 p/m rent, you will need to pay tax on all of this income. The Rent-a-room scheme only allows you to receive a maximum of 7620 per year tax free and if you go above that then unfortunately you have to pay tax on the lot. This might make a dent in your figures as effectively you'll only be receiving 900 p/m after tax (I'm presuming you'd be paying the top rate of 42%).

rick_fantastic · 05-12-2006 11:03am

ive worked out the tax implications and even with paying tax on rental income id still be ok.

ive had accountant work out the tax liablity on me and with some creative accounting my tax liabilty will be minimised

Blue Duck · 05-12-2006 11:30am

so taking that the price of the house is going to go up in line with the rate of inflation (around 4%) then the risk involved in my opinion is quite small.

Not to sounds glum but this is a rather large assumption to make especially in light of interest rate hikes and the so-called market slow down.

Im guessing you're young enough - do you really want to look back at this stage of your life and remember the expensive property you purchased or the fun times you had going out and holidaying.

As proposed earlier a smaller cheaper property could be an idea, maybe one that needs some work &/or has the possibility of adding value.

Bluetonic · 05-12-2006 11:30am

rick_fantastic wrote:

so taking that the price of the house is going to go up in line with the rate of inflation (around 4%) then the risk involved in my opinion is quite small.

How is this a given?

edited: blue duck beat me too it!

Sponge Bob · 05-12-2006 11:31am

rick_fantastic wrote:

im 23 yrs old I would be borrowing in the region of €520,000

Yes. You are completely mad unless your income is certainn to be €100k a year within three years and every year thereafter for the rest of the mortgage, (assume 30 years) . The rent a room caper can only deliver €7.5k tax free which is the equivalent of €15 k salary at the higher rate before deduction.

You may not assume appreciation, older people in their 30s and 40s did not assume appreciation either but got a very nice windfall I must admit.

rick_fantastic · 05-12-2006 11:38am

Blue Duck wrote:

so taking that the price of the house is going to go up in line with the rate of inflation (around 4%) then the risk involved in my opinion is quite small.

Not to sounds glum but this is a rather large assumption to make especially in light of interest rate hikes and the so-called market slow down.

Im guessing you're young enough - do you really want to look back at this stage of your life and remember the expensive property you purchased or the fun times you had going out and holidaying.

As proposed earlier a smaller cheaper property could be an idea, maybe one that needs some work &/or has the possibility of adding value.

ive gone over this with accountant and auctioneers i know and the chances of an interest rate hike over 1.5% is minimal.

i am willing to forego holidays and partying. ive been partying for the last 5 years.

the house im looking at has huge potential for extension. big garden and one story extension already on it.

location also is very good

rick_fantastic · 05-12-2006 11:39am

Bluetonic wrote:

How is this a given?

edited: blue duck beat me too it!

well the price is not exactly likely to go down now, is it!

rick_fantastic · 05-12-2006 11:40am

Sponge Bob wrote:

Yes. You are completely mad unless your income is certainn to be €100k a year within three years and every year thereafter for the rest of the mortgage, (assume 30 years) . The rent a room caper can only deliver €7.5k tax free which is the equivalent of €15 k salary at the higher rate before deduction.

You may not assume appreciation, older people in their 30s and 40s did not assume appreciation either but got a very nice windfall I must admit.

im not assuming appreciation, im assuming that the price of the property will rise in line with inflation.

Blue Duck · 05-12-2006 11:45am

rick_fantastic wrote:

well the price is not exactly likely to go down now, is it!

Thats what everone seems to be forgetting - YES the price may well go down

Afuera · 05-12-2006 11:47am

rick_fantastic wrote:

im not assuming appreciation, im assuming that the price of the property will rise in line with inflation.

Property prices are set by supply and demand. Inflation has little if nothing to do with it. I'm sorry, but you sound a little naive here on how markets actually work. Be very careful about fooling yourself into thinking you are taking on little or no risk!

Bluetonic · 05-12-2006 11:49am

rick_fantastic wrote:

well the price is not exactly likely to go down now, is it!

Why isn't there a chance it may go down? Would you sit back and listen to what you are saying.

Sponge Bob · 05-12-2006 11:52am

You are assuming no appreciation in real terms but you would need €100k salary a year ( inluding rent a room income of which more later) to pay your way /car/pension fund etc for the duration of the mortgage so no year off in Australia for you sunshine.

borrowing €520k on an income of €100k implies a loan of 5.2x earnings at €100k which is about as high as you can get on a salary of €100k

I had a good laugh at this.

i will have around €1500 in rental income as long as i have 3 doubles and 1 single room let out (3 doubles * €400, 1 single * €300) kinda going lowest rental i could stretch to... maybe get more for rooms

You simply cannot stuff adults into a house any more . Once you have 2 rroms let the place gets crowded and a good tenant may want a spare room so that their mammy can visit them from Cavan or something. That you will go along with of course so the box room is the overflow room is it not . Thats what you do to keep good tenants.

you are being very optimistic on rentals , I would assume 2 rooms let for 9 months a year . so thats (€350 x 2 doubles) x 9 or €5600 income . After that you run the risk of losing good tenants because the house is too crowded and getting crap or no tenants instead. Assuming that you will get any more than €6k a year cash (= €12k income before taxation ) is a totally false assumption in my opinion and is a very 80s and 90s assumption .....when there were supply shortages . There is no supply shortage any more.

This is called Diminishing Marginal Returns. . You will not accept a slum stuffed with adults for yourself, why should anyone else.

The only people I know who stuffed houses and got away with it stuffed them with family who knew each other or friends who went along with it. Never strangers.

super_furry · 05-12-2006 11:58am

rick_fantastic wrote:

ive gone over this with accountant and auctioneers i know and the chances of an interest rate hike over 1.5% is minimal.

Sounds like you might be hearing just what you want to hear. There is a risk involved and if your margins for movement in the market are as thin as they appear to be, the risk may be substantial.

rick_fantastic · 05-12-2006 12:07pm

in the area that the house is in and considering that the people underwriting the loan for me (parents) who already have a lot of property + who would consider that "if" they were looking for another investment property they would go with this one.

overcrowding not really an issue as with all the bedrooms there is 2 large sitting rooms and large kitchen. all double rooms are a good size also.

@ spongebob = where have you seen double rooms rented out for 350€ in the dundrum area?

all i quoted above were best scenario figures.... i fully understand the tax implications and the implications of not having all the rooms rented out. and the amount of cash i would need to have sitting there in that event.

i dont see how i would need a salary of over 100k to do this as i have worked out the figures on my current salary which is nowhere near 100k.

i can borrow that amount of money because my parent can underwrite the loan for me.

assuming that i have one room rented out for the first two years at interest only i can still afford the repayments.

its not like i dont understand the implications of renting, my folks have been doing it for years + i have a good understanding of how the markets work. supply and demand in the area i am looking to purchase in are very high and will continue to grow in the future. for example apartments 5 mins away are selling for 440k off plan for a two bed!

rick_fantastic · 05-12-2006 12:08pm

super_furry wrote:

Sounds like you might be hearing just what you want to hear. There is a risk involved and if your margins for movement in the market are as thin as they appear to be, the risk may be substantial.

well if interest rates move above that then this whole country is fubarred!

Sponge Bob · 05-12-2006 12:11pm

And you are really fubared with your huge mortgage. I still think you are mad but good luck. I can't really highlight any other pitfalls for you.

L5 · 05-12-2006 12:13pm

Look why don't you just go ahead and buy it, cos you're sure as hell not taking any advice that's being given to you here onboard.

hmmm · 05-12-2006 12:18pm

Heh this is beyond merely mad. What eejit will lend you half a million euros? I wouldn't mind knowing what the bank was so I can make sure I have no money on deposit with them. Half a million euros in debt - people have no concept as to what money means any more.

delly · 05-12-2006 12:24pm

Look, at the end of the day you could make it work, but thats with everything going your way and your forecast of the housing market, interest rates and rental market being spot on. Your hedging quite a few bets and you'd be lucky to have everything go your way.

On a sidenote, the house beside me has been empty with a rental agency sign for the last 6 months, now that has to hurt.

On another sidenote, if it was a simple case of the rents nearly covering the mortgage of a house, sure why aren't we all doing it?

Bluetonic · 05-12-2006 12:38pm

delly wrote:

Your hedging quite a few bets and you'd be lucky to have everything go your way.

He's not hedging any bets, it's 100% speculation. If he was hedging bets he'd be covering his options.

delly · 05-12-2006 12:49pm

Bluetonic wrote:

He's not hedging any bets, it's 100% speculation. If he was hedging bets he'd be covering his options.

My bad, I was taking a different meaning to the term.

Sponge Bob · 05-12-2006 12:49pm

He has no margin of error , whatsoever . But he is happy with that so I do not care

rick_fantastic · 05-12-2006 12:53pm

sorry i do have some margin for error, my ssia matures in april so i will have enough cash there to pay mortgage in event of something happening for 9 months.

also everything everyone has said he has already been considered. im not taking this decision lightly and going out and getting myself 1/2 mill into debt at the drop of a hat

thanks for everyones comments and input so far, has been very helpful.

Sponge Bob · 05-12-2006 12:57pm

an ssia of €25k max on a mortgage of €500k is 5% . How were you buying furniture for your venture by the way ???

Afuera · 05-12-2006 1:08pm

Sponge Bob wrote:

an ssia of €25k max on a mortgage of €500k is 5% . How were you buying furniture for your venture by the way ???

I think he was planning on taking out a mortgage of 520k on the house which is only currently valued at 480k to finance that. Or maybe that was needed to take care of the fees and stamp?

Either way, he's landing himself 40k in negative equity from day one of this venture and relying on possible capital appreciation to get any kind of return from it. If he had any sense he'd walk away but he seems rather determined to go through with this.

Crazy stuff though. If this is the way people in general are thinking throughout Ireland, there's going to be some tears and broken dreams, no doubt about it!

Do you think I´m mad????

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